Gold is on a hot streak. When will it cool down?

London (June 16)  Safe-haven assets are off to a hot start again in June, triggered by fast-moving changes in market sentiment after the US Federal Reserve unexpectedly signalled it may be heading towards an interest rate cut over the coming months.

Lower US interest rates appear to be warranted, given concerns over the health of the global economy and the potential for another downturn in light of persistent external uncertainties and trade tensions between major economies across the world, all of which are consistently adding negativity into market sentiment. Anxiety over issues that have weighed on market sentiment for nearly one year has now reached a boiling point. The most resilient economy in the world over the past couple of years, the United States, is under an intense microscope that its central bank, the Federal Reserve, might need to cut interest rates several times over the second half of 2019.

For context, the Fed paused interest rate hikes earlier this year when it became clear there were external risks connected to the possibility of a global economic slowdown because of the trade tensions' drag effect on growth. The decision reassured investors who became concerned about higher borrowing costs and potential dampening effects on investment at a time when trading relations between the US and China face uncertainty.

However, the markets were not expecting hints about a rate cut, so alarm bells rang when St Louis Fed president James Bullard mentioned that one "may be warranted soon". The Fed's renewed downbeat tone instantly revived buying interest in safe-haven-linked asset classes like gold, which has reached a bullish streak of gains in valuation at the time of writing.

Market uncertainty over the sudden shift in US interest rate expectations has practically, in the span of just over a week, added more than $50 to the price of gold as it spiked above $1,340, outrunning the US dollar, which hit a brick wall as investors re-evaluated their positions in the light of developments in interest-rate expectations. The greenback stayed true to its inverse correlation with gold this time and the Dollar Index hit a losing streak, weakening by 1 per cent so far in June.

When it comes to market reactions in an atmosphere of uncertainty, circumstances can change at the speed of light. The US interest-rate environment and linked financial instruments appear set for unexpected changes, meaning that investors are likely hedging their short-term bets with the zero-yielding gold.

Gold may be winning the safe-haven races for the moment, but for how long? It depends on market-moving factors like uncertainty over trade negotiations between the US and China and the economic effects of more expensive trading conditions between the two countries. Positive data from the US could revive interest in dollar-linked financial instruments, particularly if there is good news from employment and inflation benchmarks.

If there is bad news, as seen in the disappointing non-farm payroll numbers for May, then gold's spurt ahead could continue in the short-term based on heightened market expectations of a US interest-rate cut by the end of the year.

By the same token, if China's economy shows signs of cooling down, gold may see more support because fears of a global slowdown may intensify. Additionally, there were more risks of escalating tariff disputes between the US and Mexico which generated negative investor sentiment and weighed on trade relations. These risks appear to have subsided after a deal was announced during the week ending June 7, but there's always a chance that US President Donald Trump may bring tariff hikes back to the table, judging by the course of US-China negotiations.

Looking ahead to the third quarter, safe-haven races appear set on a course shaped by trade tensions, global slowdown fears, and market expectations for a US interest rate cut. For the time being, gold has pulled ahead but market conditions are such that change can come at any time, and the dollar may return to strong form and challenge gold's position.

KhaleejTimes